UK Inflation Rises to 3.4% in December, Exceeding Forecasts

UK Inflation Sees First Rise in Five Months

The United Kingdom's inflation rate, as measured by the Consumer Prices Index (CPI), rose to 3.4% in the 12 months leading to December 2025. This figure, released by the Office for National Statistics (ONS) on January 21, 2026, represents an increase from the 3.2% recorded in November and marks the first uptick in inflation in five months. The rise also exceeded market expectations, which had generally anticipated a more modest increase to 3.3%.

The Bank of England's primary objective is to maintain inflation at its 2% target, and this latest data point complicates the path towards that goal.

Key Contributors to the December Increase

Several sectors contributed significantly to the upward movement in the CPI:

• Alcohol and Tobacco: Prices in this category saw a notable increase of 5.2% in December, up from 4.0% in November. This acceleration was largely attributed to an increase in tobacco duty implemented in November 2025.
• Transport: The transport sector experienced a 4.0% rise in prices during December, compared to 3.7% in the preceding month. A substantial factor here was a 28.6% surge in airfares, influenced by heightened demand over the Christmas period and comparisons to particularly low prices in 2024.
• Food and Non-alcoholic Beverages: This category also saw an increase, with prices rising to 4.5% from 4.2% in November, primarily driven by higher costs for breads and cereals.

Other areas contributing to the rise included restaurants and hotels, which saw prices increase to 3.8% from 3.5%, and miscellaneous goods and services, up to 2.2% from 2.1%.

Core Inflation and Broader Economic Context

Despite the headline increase, core inflation, which excludes more volatile items such as energy, food, alcohol, and tobacco, remained steady at 3.2% in December. This figure held at its lowest level since December 2024. The Consumer Prices Index including owner occupiers' housing costs (CPIH), a broader measure of inflation, also increased, reaching 3.6% in December from 3.5% in November.

Analysts suggest that the December rise may be temporary, driven by 'temporary and technical factors'. However, the unexpected increase has led City traders to largely rule out an interest rate cut by the Bank of England's Monetary Policy Committee (MPC) in February, with expectations now leaning towards rates remaining at 3.75%. Some economists anticipate a potential rate cut in April, contingent on a further easing of price rises. Bank of England Governor Andrew Bailey had previously indicated expectations for inflation to return to around the 2% target by mid-2026. Chancellor Rachel Reeves commented that 2026 would be the 'year that Britain turns a corner' on inflation.